Why Is Timken (TKR) Down 24.3% Since Last Earnings Report?

A month has gone by since the last earnings report for Timken (TKR). Shares have lost about 24.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Timken due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Timken's Q4 Earnings Miss Estimates, Revenues Beat

Timken reported fourth-quarter 2019 adjusted earnings per share of 84 cents, which fell short of the Zacks Consensus Estimate of 95 cents. The reported figure declined 16% from $1.00 per share in the prior-year quarter. Lower volumes, and higher manufacturing and SG&A costs, partially offset by positive pricing and lower material and logistics costs, led to the overall decline in the company’s earnings.

On a reported basis, Timken delivered earnings per share of $1.48 in the fourth quarter compared with the prior-year quarter’s 77 cents.

Total revenues in the quarter came in at $896 million, down 1.5% from the year-ago quarter due to lower demand, mainly in the Mobile Industries segment, and unfavorable currency, partially offset by the favorable impact of acquisitions and pricing. The top-line figure, however, beat the Zacks Consensus Estimate of $884 million.

Costs and Margins

Cost of sales was down 2% to $640 million from the prior-year quarter. Gross profit inched up 1% year over year to $256 million. Gross margin came in at 28.6% compared with 28.0% in the year-ago quarter.

Selling, general and administrative expenses flared up 7% to $159 million from $148 million in the prior-year quarter. Operating profit decreased 9% year over year to $97 million. Operating margin came in at 10.8% compared with 11.7% in the comparable period last year. Adjusted EBITDA declined 10.5% year over year to $145.8 million.

Segmental Performance

The Mobile Industries segment revenues decreased to $445 million from $462 million in the year-ago quarter. This downside mainly resulted from lower shipments in off-highway and heavy trucks, partly offset by the benefit of acquisitions and growth in rail and aerospace sectors. The segment’s adjusted EBITDA declined 7% year over year to $60.3 million.

The Process Industries segment revenues increased 1% year over year to $451 million in the quarter, aided by acquisitions and growth in the renewable energy sector. This was partly muted by lower revenues recorded in industrial and marine sectors as well as unfavorable currency-translation impact. The segment’s adjusted EBITDA dipped 10% year over year to $98.3 million.

Financial Position

Timken generated free cash flow of $410 million in 2019 compared with $220 million in the prior year. Cash flow from operations came in at $550 million in 2019 compared with $333 million witnessed in the previous year.

During the year, the company returned $148 million of capital to shareholders through $85 million of dividend payouts and $63 million in share repurchases.

2019 Results

Timken reported adjusted earnings per share of $4.60 in 2019, up 10% from the previous year’s $4.18. Earnings missed the Zacks Consensus Estimate of $4.72. Including one-time items, the bottom line came in at $4.71, up 22% from $3.86 in 2018.

Sales rose 6% year over year to around $3.8 billion from the prior-year figure of $3.6 billion. The top line came in line with the Zacks Consensus Estimate.

Significant Acquisitions

In 2019, Timken completed the acquisition of BEKA Lubrication for $165 million. This buyout makes Timken the world's second-largest producer of industrial automatic lubrication systems. It has also enhanced the company's position in lucrative markets such as wind, and food and beverage.

Timken also acquired Diamond Chain during 2019. Diamond Chain is a leading supplier of high-performance roller chains and serves a diverse range of market sectors. Diamond Chain augments Timken's leadership in high-performance roller chains for industrial markets. These acquisitions have strengthened the company's global presence in growing markets, particularly China and Europe. These buyouts are expected to deliver significant cost and revenue synergies, going ahead.

Guidance

For 2020, Timken now expects total revenues in the range of down 2% to up 2% from 2019. The guidance factors in acquisition benefits along with unfavorable currency translation and expected organic declines in Mobile Industries. For the full year, the company anticipates adjusted earnings per share of $4.25 to $4.65. The midpoint of the guidance reflects a year-over-year drop of 3%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Timken has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Timken has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.